Wednesday, November 28, 2007

Charities Using Limited Liability Companies to Hold Real Estate

Charities should not use a limited liability company to hold real estate in Massachusetts. Robert E. Cowden wrote an article about this in the November/December 2007 issue of the Boston Bar Journal.

The Massachusetts Appellate Tax Board ruled that even though a piece of property was owned by a single member limited liability company, whose sole member was a charitable corporation, the property did not qualify for property tax exemption. CFM Buckley/North, LLC v. Board of Assessors of the Town of Greenfield.

The Third Clause of M.G.L. c.59, s.5 provides for a property tax exemption for a charitable organization, which is defined as:

(1) a literary, benevolent, charitable or scientific institution or temperance society incorporated in the commonwealth, and (2) a trust for literary, benevolent, charitable, scientific or temperance purposes if it is established by a declaration of trust executed in the commonwealth . . . . [emphasis added]
The Appellate Tax Board found that a limited liability company is not "incorporated" and therefore does not qualify for the exemption.

On a similar note, other protections for charitable organizations may be jeopardized if they use a limited liability company to hold some of their real estate assets.

For instance, the Dover Amendment M.G.L. c.40A, s.3 provides that:
No zoning ordinance or by-law shall regulate or restrict the interior area of a single family residential building nor shall any such ordinance or by-law prohibit, regulate or restrict the use of land or structures for religious purposes or for educational purposes on land owned or leased by the commonwealth or any of its agencies, subdivisions or bodies politic or by a religious sect or denomination, or by a nonprofit educational corporation. . . .
Also the charitable liability cap in M.G.L. c.231, s.85K is applicable to:
corporation, trustees of a trust, or members of an association that said corporation, trust, or association. . . .
A limited liability company may not be able to take advantage of these protections.

Monday, November 26, 2007

Usury in Massachusetts

I ran across two articles on usury and expect we will see more as the debt markets and foreclosures continue to sort themselves out and more borrowers are faced with foreclosure.

Usury is the charging of excessive interest on a loan. Most states have a law prohibiting usury and defining what is meant by usury. Usury laws were originally targeted at loan sharks. As a result, most usury statutes make the charging of usurious interest a criminal act. They also generally allow the borrower to escape from making the excessive interest payments.

Massachusetts defines interest in excess of 20% to be the interest rate that triggers usury. M.G.L. Chapter 271, Section 49. The 20% threshold also includes any brokerage fees, recording fees, commissions, forbearance or any other amounts the borrower has to pay to the lender.

The 20% rate is prorated for shorter periods of time. Upfront fees can push an otherwise legal loan into a usury loan if it is maid off early. For example, if you have ten year loan at 18%, plus a 3% commission payable at closing, that loan is usurious if the borrower pays it off at the end of the first year.

M.G.L. Chapter 271, Section 49(a) provides for a criminal sentence of up to ten years and a fine of up to $10,000. Also, M.G.L. Chapter 271, Section 4(c) allows the court to void a usurious loan.

Massachusetts has two exceptions to usury. The first is the regulated lender exception in M.G.L. Chapter 271, Section 49(e). Under this exception, the usury statute does not apply to "any lender subject to control, regulation or examination by any state or federal regulatory agency" or to "any loan the rate of interest for which is regulated under any other provision of general or special law or regulations." This means that banks, credit unions and most conventional lenders are not subject to usury in Massachusetts. However, CMBS originators and investment funds may not fall under this exception.

The second exception is by use of a "leg-breaker letter." Under M.G.L. Chapter 271, Section 49(d), you can charge usurious interest as long as you send a letter to the Attorney General with the lender's and borrower's name and accurate address. This notification is good for two years.

The leg-breaker exception is very easy to comply with. I was surprised to see stories about usury in Massachusetts.

Both stories are about a loan for the development of a 186 home community and godf course in Dracut. Massachusetts Lawyers weekly reported the story: Release Won't Shield Lender from Usury Claim of Borrower subscription). It reports a story about LR5-A Limited Partnership v. Meadow Creek, LLC, et al. (Massachusetts Lawyers Weekly subscription), with a decision coming out of the Business Litigation Session of the Superior Court. The decision found that a release or waiver of claims for usury is not effective. Usury is a public policy law and cannot be waived by the parties. The case was also reported in the Boston Globe: Usury lawsuit names Harvard, Princeton, and Yale Endowments.

The borrower made notes with an interest rate in excess of 20%. The decision from the Superior Court says it was a 21% interest rate. The Boston Globe story says one of the loans was 42%. The lender was an investment fund set up by Realty Financial Partners. The lender was a non-conventional lender and therefore could not benefit from the regulated lender exception to the usury law. They should have filed a leg-breaker letter. The decision was silent on whether the filed a letter. The Boston Globe story reports that two notices were filed, but that one was filed too early (before the lending partnership was formed) and the second filed too late (after the loan was made).

The borrower goes on to charge the limited partners of the lender violated usury and is trying to bring a claim against them directly. This seems foolhardy from a legal perspective. But it apparently worked from a public relations perspective because he got his name in the paper

The problem I have with the application of the usury laws in commercial financing is that they merely give the borrower an opportunity to wiggle out from their bargain. According to the story, the borrower thought they could quickly obtain development rights and then refinance the loan with a conventional lender at a lesser interest rate. He failed and the lender had to foreclose on the property. The borrower must have thought the interest rate was acceptable at closing. Now that the deal went south, he is trying to apply the law retroactively to get himself out of his bargain.

Disclosure: Realty Financial Partners is a client of my firm.

Wednesday, November 14, 2007

Transactions-Based Index for the Third Quarter

The MIT Center for Real Estate has just released the results from the third quarter of 2007: Transactions-Based Index (TBI)

The results from the quarter are highlighted by a total return of negative 1.7%
for all properties, including a decline of 2.5% in asset prices. The demand side
of the market showed a 3.37% decrease in reservation prices, while our estimate
of growth in supply side reservation prices (property owners) was negative 1.6%.
Among individual property type sectors, price growth was strongest in apartments
(+5.9%), and weakest in industrial (-2.7%).

Tuesday, November 13, 2007

Delay in Implementing New Mortgage Regulations

As Jay Fitzgerald of the Boston Herald reports: Companies may drop home loans

The mortgage industry does not like the new mortgage regulations proposed by the Attorney General. As I posted on this summer, these new predatory lending regulations under 93A are well intentioned but vaguely drafted: (15) Lender Must Believe the Borrower Can Repay, (16) No Documentation Loans, (17) Loans Not in the Borrower's Interest, (18) Prohibiting Discrimination.

As a result, the Attorney General announced that the regulations will not implemented this week. The new date is January 2.

Tuesday, November 6, 2007

Christmas Tree Farms and Premises Liability

As I have seen the Christmas holiday decorations starting go up already, I thought it appropriate to post about Christmas trees. The case of MacFadyen v. Maki popped up in Massachusetts Lawyers Weekly in a decision from the Massachusetts Appeals Court.

Ellen S. MacFadyen injured her elbow when she tripped over a snow-covered tree stump while selecting a Christmas tree at the Star of the East Christmas Tree Farm, owned and operated by Robert L. Maki. Mr. Maki cited M.G.L. c. 128, § 2E, as an affirmative defense to the plaintiff's claims of negligence and gross negligence.

M.G.L. c. 128, § 2E states:
No owner, operator, or employee of a farm who allows any person to enter said farm for the purpose of agricultural harvesting, including the cutting of Christmas trees under a so-called “pick-your-own” agreement shall be liable for injuries or death to persons, or damage to property, resulting from the conduct of such operation in the absence of wilful, wanton, or reckless conduct on the part of said owner, operator, or employee.

Said owner or operator of said farm shall post and maintain signs which contain the warning notice specified herein. Such signs shall be placed in a location visible to persons allowed to enter said farm for the purpose of agricultural harvesting. The warning notice shall appear on a sign in black letters, with each letter to be a minimum of one inch in height and shall contain the following notice:


Under section 2E of chapter 128 of the General Laws the owner, operator, or any employees of this farm, shall not be liable for injury or death of persons, or damage to property, resulting out of the conduct of this “pick-your-own” harvesting activity in the absence of wilful, wanton, or reckless conduct.
Unfortunately, Mr. Maki did not post a sign with that warning.

So, the Massachusetts Appeals Court held that "an owner of a tree farm must post a warning sign in accordance with G. L. c. 128, § 2E, in order to avail himself of the protection of the statute."

If you own or operate a pick-your-own Christmas tree farm, make sure you have your warning sign posted and that the warning matches that statute.

If you are going to a pick-your-own Christmas tree farm, watch where you are walking.

Monday, November 5, 2007

Why Green Building Has Staying Power

National Real Estate Investor has an article by Beth Mattson-Teig: Why Green Building Has Staying Power.

I found it interesting that 84% of corporate users expect to own or lease a green building five years from now with only 52% currently owning or leasing a green building with corporate users expecting the amount of green facilities they own or lease to more than double from 9% to 21%.

For green building to stay, two factors need to come into play: costs and market demand.

As long as green building is more expensive than conventional building, developers and operators will stay with conventional methods. Tax breaks and financial incentives can reduce the price differential and encourage green building.

Once there is more market demand, then developers and operators will pay more attention. If tenants are willing to pay more for a green building, then the price differential will be affected as well. A developer and operator will be more more willing to take on the premium cost of green building if the tenants will also carry part of the burden. The survey mentioned in the article indicates that the market demand is there and is growing.

The big problem with green building is that it is hard to retrofit existing buildings to green standards. Building a brand new building, instead of rehabilitating an existing building leads to a greater consumption of resources. It is hard to turn any existing tower building into a green building. But by being in a central business district close to public transportation and encouraging the use of public transportation you can reduce the environmental impact of the building. I have not seen any studies, but I would guess that more resources are consumed driving to a building than the building itself.

Putting up a new building in the suburbs means tearing down the trees and biomass that was on the site. The parking lot leads to more runoff and damage to aquifers. The new materials need to be harvested, manufactured and transported. That means more mining and more energy consumption.

I am all for green building and assessing the impact on the environment. I think more resources need to be focused on retrofitting existing, centrally-located buildings, with an emphasis on public transportation, biking and lower impact means of commuting.